Back in July 2019, when Turkey’s economy was in freefall and its inflation was soaring following a historic currency crash in mid-2018, and shortly after Erdogan became a de facto executive and unopposed ruler of Turkey, the Turkish president had a brilliant idea: take decades of monetary orthodoxy and flip them on their head. Faced with a lose-lose situation of slowing growth, runaway prices and a slumping lira, Erdogan conceived of what is now known as “Erdoganomics” or the bizarre epiphany that in order to fight inflation and keep the currency from plunging, all Turkey had to do was the polar opposite of what any other country in its position would do and cut rates, or as he put it, totally obliterating cause and effect, high interest rates cause inflation.
To implement this truly “unique” vision, Erdogan fired the then-governor of the Turkish Central Bank, Murat Cetinkaya, who inexplicably refused to cut rates at a time when Turkish inflation was surging, and replaced him with an obedient lapdog, Murat Uysal.
“We fired the previous central bank governor because he wouldn’t listen and we have decided to move on with our new friend,” Erdogan said in a speech at parliament in Ankara Tuesday. Erdogan said he told the new governor that “we are going to lower interest rates.”
It worked for a while: Uysal delivered a bigger-than-forecast cut on almost all occasions, that he’s reduced rates since Erdogan appointed him in July, bringing the cumulative easing under his watch to 16 percentage points – including a record move in his first month on the job.
For a while it worked: having cut rates by 16% in under a year, the Turkish economy had staged a modest rebound, but most importantly, inflation did in fact collapse, sparking quiet but agitated discussions across various corners of monetary academia, if Erdoganomics was not in fact right, and everything accepted as conventional by central banks was not upside down.
In the end, of course, it failed, and with the Turkish economy crippled by the global pandemic, with much needed tourism in freefall and accelerating a capital account crisis, the Turkish lira started to slide, and slide, and slide some more…
… until it eventually surpassed the Brazilian Real as the worst performing currency in the world, losing 30% of its value in 2020
But worst of all, instead of further cutting rates in line with Erdogan’s visions, the central bank ended its easing cycle and back in September, it resumed hiking, rising rates from 8.25% to 10.25%.
While that rate hike was the only thing that prevented the lira from a far greater collapse, it also turned out to be one more rate hikes than Erdogan could handle, and late on Friday, Erdogan unexpectedly fired the governor of the country’s central bank – less than a year and a half after he did the exact same thing – and replaced him with a former finance minister.
Murat Uysal was just 16 months into his four-year term at the helm of the central bank when he was dismissed by presidential decree in the early hours of Saturday, with no reason given although the reason was clear: instead of cutting rates to “stimulate” the economy and fight rising inflation, he hiked.
That was all the Turkish president needed to know, and so he replaced one central bank figurehead with another, even more obedient figurehead, when he appointed Naci Agbal, who served as Erdogan’s finance minister between 2015 and 2018 and is now the head of the presidential budget office.
So what happens next?
Well, for one, the latest firing will cement the reality that the Turkish central bank is now merely a branch of Erdogan’s executive presidency, one where the higher the inflation the lower the interest rates. More importantly for Turkey and its residents, Erdogan’s action will trigger a new and even more acute crisis for the Turkish lira, now that it is clear that Erdogan will resume another aggressive rate cut cycle. Only instead of sparking growth, the imminent rate cuts will end up destroying any “carry” currency value the Turkish lira may have had to western investors, leading to what will be a historic dump, perhaps as soon as Monday.
In short, we expect this to be the first salvo in what ultimately culminates as a full-blown currency crisis for the Turkish nation, and while Erdogan may try to impose capital controls, it won’t last for one simple reason: the Turkish central bank is almost out of FX reserves.
And once those are gone, the Turkish lira will promptly go bidless and will follow in the footsteps of the Venezuela bolivar.